More than a year ago Jim Chanos raised questions about China’s enormous real estate and construction investments and stated that he is shorting China’s real estate bubble. “Bubbles are best identified by credit excesses, not valuation excesses,” he said on CNBC, adding, “And there’s no bigger credit excess than in China.”
Chanos didn’t specifically lay out how he was shorting this bubble. Foreigners aren’t allowed to invest in stocks listed inside China. Chanos implied that he was focusing on companies that sell cement, glass, copper, steel and iron ore to China’s booming construction and infrastructure industry. Insider Monkey, your source for free insider trading data, investigated several indirect ways of shorting China’s real estate bubble. Here are 7 ways of shorting China’s real estate bubble:
1. Shorting commodity companies that directly benefit from Chinese demand: BHP Billiton has been thriving on China’s iron ore demand over past few years. Around half of Brazil’s and Australia’s iro ore production have been shipped to China during the past year. Rio Tinto (RIO), Vale (VALE), Peabody Energy (BTU), Freeport-McMoran (FCX), Souther Copper Corp (SCCO), and POSCO (PKX) are among the other companies that benefit from the China effect. Last month Chanos also disclosed that he is short integrated oil companies such as Exxon Mobil (XOM), Royal Dutch Shell (RDS), and Petrobras (PBR). Shorting oil producers doesn’t seem to be an effective way of gaining some short China exposure though. Legendary investor George Soros has a large Petrobras position, even though he is short emerging markets.
2. Shorting Commodity ETFs: Another alternative to shorting commodity produces is shorting commodies through ETFs. We can short oil directly by selling US Oil Fund (USO), Crude Oil Total Return ETN (OIL), PowerShares DB Crude Oil Long ETN (OLO), United States 12 Month Oil Fund (USL), US Gasoline ETF (UGA), United States Brent Oil Fund (BNO), DB Oil ETF (DBO), US Natural Gas ETF (UNG), and Heating Oil ETF (UHN). We can also short sell base metal ETFs such as Global X Copper Miners ETF (COPX), Global Copper Index ETF (CU), iPath DJ-AIG Copper Total Return ETN (JJC), Nickel ETN (JJN), Tin ETN (JJT), Aluminum ETN (JJU), and Lead ETN (LD). Alternatively we can short US Commodity Index ETF (USCI) or ProShares Trust Short Basic Materials (SBM) to build a short position in basic materials. We should warn the readers that this is not a fool-proof way of profiting from a possible Chinese real estate bubble though. There are several prominent hedge fund managers who consider commodities as a hedge against a possible US dollar depreciation. Jim Rogers is extremely bulish about commodities claiming that commodities will go up regardless of what happens in the US and World economy.
3. Shorting Country ETFs: Brazil and Australia disproportionally benefit from China’s raw material demand. Retail investors can short Brazil and Australia ETFs to bet on the collapse of China’s real estate and infrastructure investments. Possible short candidates are iShares MSCI Brazil ETF (EWZ), Global X Brazil Mid Cap ETF (BRAZ), ProShares Ultra MSCI Brazil (UBR), iShares MSCI Australia Index Fund (EWA), and IQ Australia Small Cap ETF (KROO). South Korea and Japan are the other countries that benefit from the boom in the Chinese economy. Investors should consider selling iShares MSCI South Korea Index Fund (EWY), IQ South Korea Small Cap ETF (SKOR), iShares MSCI Japan Index Fund (EWJ), iShares MSCI Japan SM Cap (SCJ), Wisdom Tree Japan Small Cap Fund (DFJ), and SPDR Russell/Nomura Prime Japan ETF (JPP).
4. Shorting Chinese ETFs: A more direct and efficient way of profiting from a potential Chinese real estate bubble is shorting Chinese ETFs. It may not be feasible for a multi-billion dollar hedge fund to use this method, but retail investors doesn’t have size problem here. The best China ETFs to short seem to be Guggenheim China Real Estate ETF (TAO), EGS INDXX China Infrastructure ETF (CHXX), and Global X China Materials ETF (CHIM). These three ETFs are directly related to China’s real estate market and should decline the most in the event of a collapse in the construction and infrastructure industry. Alternatively, one can short broader Chinese ETFs to profit from this too. When the real estate bubble popped in the US, everything went down. iShares FTSE/Xinhua China 25 Index (FXI), the most widely held Chinese ETF, is arguably best-placed to capitalize on a rise/fall of China’s fortunes. SPDR S&P China (GXC), Market Vectors China ETF (PEK), Hong Kong Index Fund (EWH). Guggenheim/AlphaShares China All-Cap Fund (YAO), Guggenheim/AlphaShares China Small Cap Index ETF (HAO), iShares FTSE NAREIT Asia ETF (IFAS), and RMR Asia Pacific Real Estate Fund (RAP) are among the other alternatives.
5. Buying Short ETFs: There are several ETFs available for investors who can’t or don’t want to short sell stocks. Theoretically, short selling exposes investors to potentially unlimited losses with limited gains. The following ETFs limit losses for its investors who want to gain some short exposure to Chinese stocks: ProShares Trust Short FTSE/Xinhua China ETF (YXI), Direxion Daily China Bear 3X Shares (CZI), ProShares UltraShort MSCI Emerg(EEV), ProShares UltraShort FTSE/Xinhua China 25 (FXP). We should warn investors that the downside protection of these short or ultrashort ETFs usually comes with a high price tag.
6. Shorting Chinese Real Estate-Related Companies That Trade in the US: There are a few Chinese real estate-related companies that trade in the US. For example, Home Inn’s & Hotels Management Inc (HMIN) is a Chinese hotel company but it also develops properties in China. The other stocks that can potentially be shorted are China Housing & Land (CHLN), Xinyuan Real Estate (XIN) , E-House (EJ), China Real Estate Information Company (CRIC), China Shuangji Cement (CSGJ.OB), and China HGS Real Estate (CAHS.OB).
7. Shorting Other Chinese companies with the highest open short interest: Another way of profitting from a Chinese real estate bust is to short the weakest Chinese stocks that trade in the US. The Chinese stocks with the highest open short interest are more likely to be vulnerable to a downturn in Chinese markets. Here are some candidates that recently had the highest open short interest: China MediaExpress (CCME), China-Biotics (CHBT), China Agritech (CAGC), Duoyuan Global Water (DGW), China Biologic Products (CBPO), Telestone Technologies (TSTC), China New Borun (BORN), Harbin Electric (HRBN), China Integrated Energy (CBEH), and Gulf Resources (GFRE).